Page 50 - ABHR MUD BOOK 2022

within its municipal boundaries or the extra territorial jurisdiction of the city. If a MUD exists in
an unincorporated area of a county that it is not in the extra territorial jurisdiction of a city, the
county can review the creation of the MUD. After receiving such consent, a MUD is created
legislatively or administratively through the TCEQ, being subjected to various standards and
reviews throughout. A MUD must comply with various statutes specific to MUDs, such as
Chapters 49 and 54 of the Texas Water Code, as well as all of the statutes that generally apply to
local governments.

Once a MUD is created and begins its existence, it is immediately subjected to various state
standards that apply to all other political subdivisions in the State of Texas, including the Open
Meetings Act, the Public Information Act, the Election Code, the Property Tax Code, and the
Public Funds Investment Act. Additionally, beyond the parameters put into place by the Texas
Constitution and various state statutes, MUDs are heavily regulated by the TCEQ. Chapter 293
of the Texas Administrative Code pertaining to the TCEQ provides 17 subchapters regulating the
operations of MUDs, ranging in topics from their creation, to audit reports, to utility system rules
and regulations, to the review and approval of the issuance of bonds.

A MUD must satisfy strict financial feasibility rules issued by TCEQ in order to issue utility
bonds. Before a MUD can issue any utility bonds, the TCEQ rules require (i) the completion of
all water, sewer, and drainage facilities to be financed with the proposed bond issue, (ii) the
completion of all streets and roads that provide access to the areas served by the utility
improvements, (iii) the completion of at least 25 percent of the projected value of houses,
buildings and/or other improvements shown in the projected tax rate calculations used to support
the bond issue, and (iv) a showing that the land values, existing improvements, and projected
improvements will be sufficient to support a reasonable tax rate for debt service payments for
existing and proposed bond indebtedness while maintaining competitive utility rates. More than
just a legalized disclosure of the risks, these standards are designed to protect the consumer
against excessive tax rates and maintain the integrity of MUD bonds, resulting in better interest
rates for future MUD projects.

All MUD bonds must also be approved by the Attorney General of Texas. As part of the
approval process, the Attorney General’s (AG’s) Office not only reviews the resolution of the
MUD Board of Directors authorizing the issuance of the bonds, it also reviews various
documents related to the financial transaction, including paying agent agreements and documents
reflecting the initial sale of bonds. The AG’s Office also examines evidence of publication
requirements and confirms that all bond expenditures have been properly approved by TCEQ.
Moreover, if a district has not issued bonds before, it must not only prove it has been properly
created, but must also effectively demonstrate that bond elections were conducted within the
parameters of state and federal law. Additionally, the AG’s Office reviews annexation and
exclusion orders, ensuring that all proper notifications have been filed with TCEQ or the local
county deed records.

Of course, before MUD bonds can be issued, they must be authorized by the voters of the MUD
at an election held in conformance with Texas Election Code requirements on a uniform election
date.

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